HR practices in Vietnam

Vietnam started a profound economic reform in 1986 that aimed to transform the country
from a command economy into market oriented economy. From the early days of the
economic reform, economic structure reforms and open-door policies have become an
integral part of overall economics (World Bank, 1999). As a consequence, Vietnam has
substantially elevated its economy and the living standards of Vietnamese people. The
country reaped average economic growth rate (GDP) of over 7% during the 1990s and
early 2000s, especially more than 8% in 2006, which made it one of the highest growing
economies in the World (World Bank, 2006).
These reforms have been occurring in both the public and private sector. In the public
sector, one of the most important aims of the State has been to restructure the state-owned
enterprises (SOEs) through equitization (privatization) process. This process was initiated
in 1992 with the statement of sales of SOEs to the public (Quang & Dung, 1998). This
effort can be regarded as one that would convert un-profitable SOEs into more dynamic,
fast growing private enterprises, injected with a stronger entrepreneurial spirit (Henrik,
2005).
It is worth noting that Vietnam had about 12,000 SOEs at the outset of its economic
reforms; however, financial performance of these SOEs lagged since they lacked
incentives to be more efficient and profitable (Vu, 2004). In addition, they utilized a
disproportionate level of the country's limited resources, holding approximately 75% of
the country's assets, employing 30% of the labor force, and earning 85% of available
bank credit; yet, contributing only 40% to the country's GDP (Nguyen, 1995).
The reasons for un-profitability and inefficiency of SOEs are innumerable, but mainly
from SOEs management mechanism. This kind of mechanism, largely influenced by the
subsidy system, did not motivate managers to be more responsible and open minded as
actually practiced in a market economy. Specifically, there was no impetus to utilize
business management methods, such as marketing, financial, or human resource
management, to improve enterprise financial performance, because managers were not
seriously appraised by enterprise results, and employees were not motivated to conduct
their work well.
The equitization program has been successful in transforming a significant number of
SOEs into equitized SOEs (ESOEs), and the Vietnamese government hopes that these

ESOEs will operate their business activities under market conditions, and perform better
than their former SOEs. It has been argued that what makes an enterprise effective is not
only its financial resource, which ESOEs in Vietnam can manage to have but also
important intangible assets such as human resource (Quang & Dung, 1998). Indeed,
evidence has shown that economic development is positively related to investment in
human capital (Torrington & Huat, 1994). Thus, ESOEs have recently begun to apply
HRM practices, ubiquitous in the developed countries, in order to improve their financial
performance. This study focuses on theoretically analyzing the effects of certain human
resource management practices applied by ESOEs, such as human resource planning,
compensation, training, performance appraisal, and recruitment and selection, on
enterprise financial performance. More specifically, the objectives of this study are twofold:
To examine how well are certain human resource management practices applied into
ESOEs; and
What effects, if any, do these human resource management practices have on ESOEs
financial performance?
BACKGROUND
Equitization is viewed as one of the primary approaches to reforming SOEs in Vietnam.
Equitization can be conducted based on the following four forms (MPDF, 1999): (1)
retaining state shares intact while selling new shares; (2) selling a given proportion of the
existent state shares; (3) detaching and then selling parts of an SOE; and (4) selling off all
state shares to workers and private shareholders.
In many countries, equitization has played an important role in setting up private property
rights. In Vietnam, the situation is somewhat different due to the fact that there had been a
private sector prior to 1998 when the equitization program was aimed at being speeded
up. Hence, equitization can also be considered as a means in order to significantly change
both the structure of ownership and the firm management mechanisms.
It should be noted that 2,220 SOEs were equitized at the end of 2004. Such enterprises
accounted for approximately 40% of the total number of SOEs and owned about 8.2% of
all SOEs' total state capital (Le, 2004). It is projected that equitization will be completed
by 2010. By that time only about 1,200 SOEs will be completely owned by the state.

Over the next year, About 1,460 SOEs will be equitized and among them are a number of
large enterprises.
Although there are still many shortcomings pertaining to the equitization process, there
are enough reasons for optimism if equitization is placed in the broader context of SOEs
reform and private sector development. Firstly, equitization is likely to make favorable
conditions for poorly performing firms to mobilize social and financial resources to work
better in a new environment after being equitized. Although equitization is partial,
gradual, and incomplete, it is still more efficient than 100% public ownership (Fredrik,
2006). According to statistics, ESOEs' chartered capital has significantly increased by
44%, revenue by 23.6%, employees' income by 12%, and dividend yield is 17.11%
(Fredrik, 2006). In addition, a nation-wide survey of 261 ESOEs conducted by the
Central Institute of Economic Management (CIEM) in 2002 revealed that equitization has
had significantly positive effects on the overall performance, financial status, and
restructuring of most enterprises. For example, 93% of firms reported that their financial
performance improved after equitization.
The reasons for the positive results can be influenced by autonomy, incentives and
corporate management. With incentives such as profit sharing, the new owners should be
more inclined than the old to pursue efficiency, entrepreneurial opportunity and profits.
Additionally, with the SOE constraints on wages being lifted, it is very likely for
managers to attract high quality employees and to utilize performance based salary scales
to motivate existing employees to effectively and efficiently perform their jobs.
Indeed, the autonomy that comes with equitization means that managers are freed to
pursue efficiency, devote their time to things that really matter, which may result in
improved performance. It is obvious that there is a relationship between autonomy and
corporate governance that can be manifested via asking "who makes which decisions". In
this regard, a new cadre of managers has emerged with a dynamic business spirit
characterized by the ability of management in efforts to minimize threats and take
advantage of opportunities as a consequence of the open-door policy. Managers in
ESOEs have no longer to comply with orders coming down from the bureaucratic
hierarchical management system, and they have much more room to exercise their own
leadership and management competencies. In addition, they are more responsible for
decisions they make in terms of firm outcomes, thus making substantial contribution to
the performance of firms after equitization.

It is contended that although ESOEs were born via the equitization program, they play a
pivotal role in Vietnam's economic growth rate in the coming years, and the success of
ESOEs is expected to depend in part on how well managers of ESOEs govern two kinds
of the firm resources, namely financial resources and human resources. This study
focuses on the latter, and investigates what effects, if any, does the application of certain
human resource management practices have on financial performance of ESOEs.
HUMAN RESOURCE MANAGEMENT PRACTICES AND FINANCIAL
PERFORMANCE
Human Resource Planning
Little research has been done regarding human resource management practices in
Vietnam. This is not surprising in a country where research is still virgin territory,
especially in management (Ken, 2001). However, a number of studies exist that
concentrate on the challenges of doing business (Von & Clarke, 1995), managers' work
values (Ralston et al., 1999), and the examination of economic and investment
environment (Kim, 1996; Scown, 1997; Venard, 1998). These scant studies reveal that
one of the basic reasons that contributed to the defeat of SOEs is the absence of human
resource planning. Thus, it can be expected that ESOEs will implement human resource
planning practices in order to provide adequate and competent human capital for better
firm performance.
For all enterprises, human resource planning is extremely important because it enables
the organization to define and address the overriding people related issues in a
meaningful, actionable way (Baird & Meschoulam, 1988). With increased emphasis on
productivity, quality, and service, firms now recognize that attention to the financial and
technological side of business must be balanced by attention paid to planning human
resources (Walker, 2002). Human resource planning ensures that enterprises will have the
right people with the right skills and in the right numbers, organized appropriately, and
managed effectively (Greer et al., 1989; Schuler, 1989; Mills, 1985).
In addition, it is argued that the merger between strategic and human resource planning,
concentrated on customer-employee ties, provides businesses with both strategic and
organizational capability which cannot easily be imitated by rivals (Brush & Ruse, 2004).

This is likely to generate unity between customers and employees. It also furnishes
business with processes to set up strategies and appraise business needs, and to utilize
resources to carry out those strategies. It brings about closed links between strategic and
human resource planning aimed at generating the synergy and unique expertise of each
party needed in the planning process. Finally, it brings about competitive advantage via
collaboration, and improves firm financial performance (Ulrich, 2002). Given the fact
that ESOEs are making efforts to plan their human resources, and that research suggests a
variety of benefits deriving from human resource planning; therefore it is proposed:
Proposition 1--There is a significantly positive relationship between human resource
planning and financial performance in ESOEs.
Compensation--Pay for Performance
During the time of centrally planned economy, all SOEs budgets were subsidized by the
State. The State also played the role of the sole supplier and the biggest customer of
SOEs. Production targets were assigned by the State and all the products had to be
delivered back to the State for distribution. Under this system, SOEs did not have to pay
attention to customer satisfaction and would only have little concern for business
management. The employees and managers of SOEs seemed to avoid their duties by only
limiting to what the centrally planned economy system required them to do. SOEs
managers and employees were not motivated to perform their tasks due to the fact that no
matter what different efforts and performance they made, they were paid the same, which
destroyed their working morale. With the transformation of SOEs into ESOEs, it is
strongly expected that ESOEs will apply the performance based pay philosophy, which
has been overwhelming in firms in the developed economies, so as to inspire enthusiasm,
efficiency, and productivity into their human resource capital.
The performance based pay consists of a set of practices that links rewards and bonuses
to job performance. Traditionally, staffs are rewarded based on the amount of products
they produce, with stock options where rewards are linked to shareholder value,
commissions and bonuses, and profit or gain sharing (Rowley, 2003). The pay for
performance has been theoretically and empirically supported, regarding the powerful
impact it can have on job performance and, ultimately, the competitive advantage of a
company. Economic theories, especially expectancy and agency theory, contend that
people are inspired to work if they know that their performance is noted and rewarded

(Vroom, 1964).
Empirically, research has shown that profit sharing has a positive effect on the financial
performance of large firms in manufacturing, construction, and retailing industries
(Bhargava, 1994); profit sharing has also been shown to have a positive effect on labor
productivity in U.K. engineering firms (Cable & Wilson, 1990); and a negative effect on
absenteeism and turnover (Wilson & Peel, 1991). Furthermore, a study of 400 UK and
100 American companies revealed that those using performance based philosophy pay
resulted in more than twice the shareholder returns on average than those without (The
economist, 1998). In the same vein, Luthans et al. (2001) observed that each dollar of
incentive pay brought about a gain of approximately $2.34.
However, there are also studies eliciting the drawbacks of such pay systems. Some have
indicated that pay for performance has some moral and practical problems (Kohn, 1993).
Firstly, it is considered morally flawed due to the fact that it requires one person to
control another.
Secondly, it is viewed as practically wrong due to the fact that pay for performance is
very likely to harm productivity (Milkovic & Newman, 2003). Furthermore, the success
of performance based pay philosophy is, in a broader context, dependent upon many
exogenous variables, such as culture. For example, multinational companies should take
culture into account when designing compensation strategies (Gomez-Mejia, 2002),
especially CEO compensation (Tosi & Greckhamer, 2004).
While results are inconclusive, a significant number of studies support positive impacts
of performance based compensation on firm performance. Therefore, we propose:
Proposition 2--There is a significantly positive relationship between performance based
compensation and financial performance in ESOEs.
Training
Human factor is the biggest bottle-neck to Vietnam's economic development. In spite of
the fact that the educational system in Vietnam has made significant contribution to the
generation of a competent workforce, good management skills are still scant that prevents
Vietnam from its economic rejuvenation. It is criticized that universities and training

institutes in Vietnam are not really successful in meeting the demand for technical and
managerial skills.
According to a recent report in the Vietnam Economics News (1999), in spite of an
increasing demand for professions in fields like architecture, marketing, accounting,
finance, foreign languages, and computer science, universities and training institutes have
lagged to disseminate these disciplines. Some universities are starting to respond to the
challenges by focusing on business education, but are unable to fulfill the demand.
Economic reforms and the effects of utilizing new technologies have further enlarged the
gap in managerial know-how. In the earlier period of economic reform, it was expected to
observe the shortages in managerial skills necessary to interact with foreign firms,
improve financial management, and upgrade computer and technical capacities. The
failure to handle these issues in the years to come may hinder economic reforms.
Given the critical role of training in providing managers and employees with the
technical and managerial skills required, the Vietnamese government has introduced the
VND119.4 billion dollar program to assist human resource training for small and
medium-sized enterprises, including a significant number of ESOEs (Decision
143/2004/QD-TTg, 2004), for the 2004-2010 period. The decision originates from the
fact that human resources are viewed as one of the primary weakest points embedded in
small and medium-sized enterprises which are a vital ingredient of Vietnam's
socioeconomic development planning.
The program is scheduled into two stages. The first (2004-2008) would conduct surveys
on the specific needs of small and medium-sized enterprises for human resource training,
and would organize seminars and experience exchanges with both local and foreign
organizations to improve the firm performance. The second stage (2008-20010) is
expected to involve a variety of training efforts for the development of the necessary
skills on administration, marketing, finance, accounting, technology, and human
resources.
Research has strongly suggested that training is related to organizational-level outcomes
(Kozlowski et al., 2000). It should be noted that a variety of models found in the strategic
human resource management literature are utilized to explicate how training is likely to
result in better organizational outcomes. For example, a conceptual framework

incorporating six theoretical models (e.g., the resource based view of the firm, the
behavioral perspective, and cybernetic systems perspective) is developed by Wright &
McMahan (1992) in order to thoroughly investigate strategic human resource
management. According to their framework and the theoretical models, human resource
management practices influence the human resource capital pool and human resource
behaviors; human resource behaviors then lead to firm-level outcomes. Therefore,
Proposition 3--There is a significantly positive relationship between training and financial
performance in ESOEs.
Performance Appraisal
According to Cascio & Aguinis (2005), performance appraisal is the actual process of
gathering information about individuals based on critical job requirements that describes
the job-relevant strengths and weaknesses of each individual.
Performance appraisal is believed to play an important role in the human resource
process by aiding training and rewarding decisions (Fombrun et al., 1984). It is, therefore,
an essential input in career management as a whole. In addition, performance is
considered as means to improve company operations, increase efficiency, increase
product reliability, productivity and finally firm financial performance (Roberts, 1995;
Youndt et al., 1996).
The ability to carry out meaningful performance evaluation on a regular basis and act on
them can be regarded as a good test of an organization's human resource management
philosophy. There is an agreement in the literature that the effectiveness of performance
appraisals substantially depend on whether performance goals are achievable and
motivational. This leads to avoiding a very common problem that performance
assessments are based on social and political considerations, not on objective criteria of
performance (Longenecker et al., 1987). Equally important, feedback should be provided
in such a timely and constructive manner that is unlikely to result in either acrimony or
unnecessary defensiveness (Conway et al., 2001).
In SOEs, there were many problems embedded in the appraisal system. Such problems
consisted of prejudice, favoritism, insufficient knowledge of the employees performance,
ignored outcomes, time-consuming, and deteriorating relationships among workers

(Quang & Dung, 1998). Obviously, in spite of the fact that there were appraisal systems
in SOEs, in almost all situations, it was just a lip-service exercise that both managers and
employees manipulated to generate satisfactory outcomes (Quang & Dung, 1998).
Therefore, we propose:
Proposition 4--There is a significantly positive relationship between performance
appraisal and financial performance in ESOEs.
Recruitment and Selection
In the strategic human resource management literature, selection seems to play a crucial
role in the attainment and development of human resource capital. This is regarded as the
first step in which the firm seeks to gain the fit between human resource and business
strategies. The notion of fit means that by owning the human resource capital that most
adequately supports the business strategy, the firm positions itself to bring about
competitive advantage through its people management (Schuler & Jackson, 1987).
Research suggests that investment in effective selection can be positively related to
organizational performance (Terpstra & Rozell, 1993). Studies have also attempted to
derive the most efficient and cost effective formal methods (e.g., Anderson & Herriot,
1994; Heneman et al., 1997). As such, methods like assessment centers, psychometric
tests, and bio-data have been ranked much higher than interviews (e.g., Reilly & Chao,
1982; Hunter & Hunter, 1984).
In ESOEs, a significant number of efforts have been just implemented in order to further
formalize selection procedures consisting of the utilization of entrance examinations and
lengthy induction/training periods. In general, the recruitment process is initiated via
words of mouth and progresses with comprehensive assessments and analyses of
potential candidates' merits and family background. Hence, when the candidates are
invited to participate in an interview, it is possible that the interview panel has already
had substantial knowledge of the candidates. It is therefore proposed that
Proposition 5--There is a significantly positive relationship between recruitment and
selection and financial performance in ESOEs.
CONCLUSION

Vietnam has nowadays been considered as one of the fastest growing economies in the
World. The economic development of Vietnam is mainly believed to be attributable to the
economic renovation policy initiated in 1986. The economic renovation policy aimed to
transform Vietnam into market oriented economy from a closed, centrally planned
economy. It has created profound changes in the business environment and labor markets
leading to various and unfamiliar challenges for enterprises, making human resource
management a vital matter.
The economic renovation policy has been occurring in both the public and private sector.
In the public sector, one of the most important aims set up by the State is to restructure
the state-owned enterprises (SOEs) through equitization process (SOEs are transformed
into equitized SOEs--ESOEs). With this equitization process, the State strongly believes
that ESOEs will make more contributions to Vietnam's economic growth rate in the
coming time.
It is argued that to survive fiercer competition, ESOEs face the need to raise managerial
competencies, especially for human resource management practices, to good levels found
elsewhere in the World (McDaniel et al., 1999). Thus, this study theoretically proposed
that certain human resources practices will have strong positive relationship with the
financial performance of ESOEs.
LIMITATIONS AND FUTURE RESEARCH
This is a theoretical paper that suggests a relationship between HR practices and financial
performance of Vietnamese ESOEs. Therefore, empirical work is necessary to support the
propositions here presented and gain better understanding on the impact that HR practices
have on ESOEs. Additionally, since the purpose of this work is to propose the existence
of a relationship between HR practices and financial performance it does not analyze how
these practices are implemented and what impact dues culture have in such practices.
Future research is necessary to understand what specific practices are used in ESOEs in
Vietnam, and how culture influences HR practices in this country.
REFERENCES
Baird, L., & Meschoulam, I (1988). Managing two fits of strategic human resource
management. Academy of Management Review, 13(1), 116-128.

Bhargava, S (1994). Profit sharing and the financial performance of companies: evidence
from UK Panel Data. The

Goole dich ban tieng viet

Vit Nam bt u mt cuc ci cch kinh t su sc trong nm 1986 nhm mc ch
chuyn i t nc t mt nn kinh t ch huy sang nn kinh t theo nh hng th
trng. T nhng ngy u ca cuc ci cch kinh t, ci cch c cu kinh t v chnh
sch m ca tr thnh mt phn khng th thiu ca nn kinh t tng th (Ngn hng
Th gii, 1999). Kt qu l, Vit Nam nng ln ng k nn kinh t v mc sng ca
ngi dn Vit Nam. Quc gia ny gt hi c tc trung bnh tng trng kinh t
(GDP) trn 7% trong nhng nm 1990 v u nhng nm 2000, c bit l hn 8% trong
nm 2006, lm cho n mt trong nhng nn kinh t tng trng cao nht trn th gii
(Ngn hng Th gii, 2006).

Nhng ci cch ny xy ra c hai khu vc cng v t nhn. Trong khu vc cng,

mt trong nhng mc tiu quan trng nht ca Nh nc c c cu li cc doanh
nghip nh nc (DNNN) thng qua c phn ho (t nhn) qu trnh. Qu trnh ny
c bt u vo nm 1992 vi bo co kt qu kinh doanh ca doanh nghip nh nc
cho cng chng (Quang & Dng, 1998). N lc ny c th c coi l mt trong s
chuyn i doanh nghip nh nc cha c li nhun vo nng ng hn, pht trin
nhanh cc doanh nghip t nhn, tim mt tinh thn kinh doanh mnh m hn (Henrik,
2005).

l gi tr lu rng Vit Nam c khong 12.000 doanh nghip nh nc ngay t u

ci cch kinh t ca n; Tuy nhin, hot ng ti chnh ca cc doanh nghip nh nc
tt hu v h thiu ng lc c hiu qu hn v c li nhun (V, 2004). Ngoi ra, h
s dng mt mc khng cn xng ca ngun lc hn ch ca t nc, nm gi
khong 75% ti sn ca t nc, s dng 30% lc lng lao ng v thu nhp 85% tn
dng ngn hng c sn; Cha ht, ch ng gp 40% GDP ca c nc (Nguyn, 1995).

Nhng l do b li nhun v khng hiu qu ca doanh nghip nh nc l v s,

nhng ch yu l t c ch qun l doanh nghip nh nc. y l loi c ch, nh
hng ch yu bi h thng tr cp, khng khuyn khch cc nh qun l c trch nhim
hn v ci m nh tc thc t trong nn kinh t th trng. C th, khng c ng lc
s dng cc phng php qun l kinh doanh, chng hn nh tip th, ti chnh, qun l
ngun nhn lc, ci thin hiu sut ti chnh doanh nghip, bi v cc nh qun l
khng c thm nh mt cch nghim tc bi kt qu doanh nghip v ngi lao ng
khng phi l ng lc thc hin cng vic ca h tt.

Chng trnh c phn ha thnh cng trong vic chuyn i mt s lng ln cc

doanh nghip nh nc vo doanh nghip nh nc c phn ha (ESOEs), v chnh ph
Vit Nam hy vng rng nhng ESOEs s hot ng hot ng kinh doanh trong iu kin
th trng, v thc hin tt hn so vi doanh nghip nh nc trc y ca h. C lp
lun cho rng nhng g lm cho mt doanh nghip c hiu qu khng ch l ngun lc ti
chnh ca mnh, m ESOEs ti Vit Nam c th qun l c m cn ti sn v hnh
quan trng nh ngun nhn lc (Quang & Dng, 1998). Tht vy, bng chng ch ra
rng pht trin kinh t l tch cc lin quan n u t vo vn con ngi (Torrington &
Huat, 1994). Nh vy, ESOEs mi bt u p dng thc tin qun l nhn s, ph
bin cc nc pht trin, nhm nng cao hiu qu ti chnh ca h. Nghin cu ny tp
trung vo l thuyt phn tch nhng tc ng ca hot ng qun l ngun nhn lc nht
nh c p dng bi ESOEs, nh quy hoch ngun nhn lc, bi thng, o to, nh
gi hiu qu v tuyn dng v la chn, v hot ng ti chnh doanh nghip. C th hn,
cc mc tiu ca nghin cu ny l hai mt:

kim tra tt nh th no l hot ng qun l ngun nhn lc nht nh p dng vo

ESOEs; v

Nhng h qu, nu c, lm nhng bin php qun l ngun nhn lc vo ESOEs hot
ng ti chnh?

BI CNH

C phn ha c xem l mt trong nhng phng php tip cn chnh ci cch doanh
nghip nh nc ti Vit Nam. C phn ha c th c thc hin da trn bn hnh thc
sau y (MPDF, 1999): (1) gi li c phn nh nc cn nguyn vn trong khi bn ra c
phiu mi; (2) bn cho mt t l c phn nh nc tn ti; (3) tch v sau bn cc b
phn ca mt doanh nghip nh nc; v (4) bn tho tt c c phn nh nc cho ngi
lao ng v cc c ng t nhn. ...